A couple of days ago Buttonwood over at The Economist touched on my favourite topics: the growth of the Western service industry, the death of Western manufacturing, and the deep interconnectedness of the global economic system. His hook was that most claims of parasitism are at best not-straightforward, and at worst are unfounded. From The Economist:
Are all manufactured goods intrinsically superior to services? Would you rather have a wig or a haircut? Just as there is only so much food we can healthily consume, there is only so much physical stuff we need. We have service-dominated economies because people like to consume services from TV programmes through video games to leisure activities like eating out. When General Motors sells a car, the chances are that it is selling it to someone who works in the services sector; so who is the parasite in this situation?
At the national level, we can say that most countries cannot produce all the things they need (or at least desire). Britain, for example, needs food from abroad. So it needs industries that can export stuff in order to generate the earnings that pay for imports. Here the bankers start to look a lot more valuable; Britain’s invisible earnings from financial services are highly valuable.
A more realistic question might be “would I rather have a factory making hair clippers, or a cabal of lawyers, financiers and bureaucrats who readily declare themselves too-big-to-fail and hose themselves down in taxpayers’ liquidity?”
But nonetheless it is a relevant point — because it leads us onto the real question of why economies need to become more decentralised, and less reliant on externalities. To answer that we need to look at the shape of globalisation. People all around the globe have needs and wants, as well as labour, produce and capital to get those things they need and want. With globalisation, if someone has the technology, capital and know-how to start a factory manufacturing — for the sake of example — hair clippers, then they can start it wherever they believe it would be most profitable. The bounties of oil infrastructure, and the low cost of global shipping mean that that could be anywhere on the planet with access to resources, cheap labour, and free trade. And that has meant that cheap Chinese and Asian labour has allowed these nations to accumulate a vast productive base. This means that advanced economies like Britain and America — rich nations, with vast amounts of accumulated capital, technology, and know-how — can import the goods they once manufactured and turn their productive infrastructure to a service-led model — concentrating on industries like finance, telecommunications, information technology, and the creative arts. The beauty of globalisation is that they have given the West a free lunch, and allowed for an ever-greater stream of innovation in computing, artificial intelligence, robotics, and life sciences, as well as a dominant position in the global creative industries
But not everything that is beautiful is sustainable. The West moving requires oil, goods, and agriculture, and Western nations are increasingly importing more and more of these. And just so long as the global infrastructural systems holds together, this is all very well. But what happens if it doesn’t? We know that periods of free trade, free movement, and globalisation tend to be short-lived. Large complex systems — like the global economy — with trillions of inputs and outputs are highly fragile. From Nassim Taleb:
People talk about black swans but they don’t talk about robustness, which is the real lesson of the black swans.
It’s like saying a bridge is fragile. I can’t predict which truck is going to break it, so I have to look at it more in a structural form — what physicists call the percolation approach. You study the terrain. You don’t study the components. You see in finance, we study the random walk. Physicists study it percolation. They study the terrain — not a drunk person walking around — but the evolution of the terrain itself. Everything is dynamic. That is percolation.
And then you learn not to try to predict which truck is going to break that bridge. But you just look at bridges and say, “Oh, this bridge doesn’t have a great foundation. This other one does. And this one needs to be reinforced.” We can do a lot with the notion of robustness.
The global economy is like a bridge — lots and lots of trucks (events) drive over it, and we cannot predict which will break it — but we do know that for a variety of reasons — high Western indebtedness, the growth of Eastern military might, vulnerable oil reserves concentrated in hot-spots, vulnerable oil and shipping infrastructure, under-confidence and Keynesian liquidity traps, unexpected global conflict, climate change, solar flares, a global pandemic — that the global infrastructure is vulnerable to collapse. We don’t know when, or how it will happen, but we know that there is a lot of stress and strain on the bridge.
So countries, regions, institutions, individuals and groups that want to survive and thrive through any breakdown of global infrastructure and resultant turmoil need to be relatively self-sufficient in a number of domains: food production & consumption, energy generation and storage, labour, capital and so forth. Buttonwood’s article, meanwhile, delves into the debate on just how much debt the government can sustain, and whether or not we need to pay down our deficits quickly. This is really the same problem — debt creates fragility, because it leaves debtors with less margin for fiscal error. Finally, he concludes that in reality we are all subject to some kind of dependency:
Some humility is needed from both sides in the economic debate. We cannot run huge public sector deficits forever but that is not the same as saying that we should never run a deficit, nor that we should balance it now. We do not want “too much” government interference in the economy but there are plenty of vital services that the government provides. We are all of us economic parasites in a way, since we are dependent on the decisions and the well-being of others.
And there is the point — as humans we are all dependent on the sun’s heat and light. We’re dependent on the carbon, nitrogen, oxygen, hydrogen and phosphorus cycles. We’re dependent on the strength of our skeleton, the strength of our muscles and our brain function. We’re dependent on the social fabric of our families and communities. Why then are we allowing a system of globalisation persist that creates additional global fragility when we could so easily lessen the fragility and decentralise?
So the problem is not really parasitism, or over-reliance on services, or the export of jobs to the East, or the ridiculous and bulging levels of debt. The problem is the global fragility — hard to measure, define and quantify, but nonetheless very real — that this system of globalisation, and the above problems creates. We ignore fragility at out peril.